9/13/2017 New Yorker article on Tax Reform

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9/13/2017 New Yorker article on Tax Reform

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The New Yorker – 9/13/2017

Who Knew That Tax Reform Could Be So Complicated?

Article by Ryan Lizza - Washington correspondent for The New Yorker where he covers the White House and presidential politics and writes the magazine's "Letter From Washington" column; he is also a political analyst and on on-air contributor for CNN.

Back in January, Paul Ryan, the main architect of the Republican Party’s 2017 legislative agenda, outlined an ambitious schedule to repeal Obamacare and pass tax reform. He told his fellow-Republicans, at a retreat in Philadelphia, that Obamacare would be dead and gone by April and what he promised would be “revenue-neutral” tax legislation—that is, tax reform that would not add to the deficit—would be enacted before members went home for the August recess. Ryan, according to Politico, used a Gantt chart, like those used in construction projects, to sell the plan to Trump, who enthusiastically endorsed it. Since then, things haven’t gone exactly according to plan.

Republicans were unable to undo the Affordable Care Act, and, because of the limits of reconciliation, the arcane parliamentary process they used to attempt to repeal it, they only have until September 30th if they want to try again. Despite a last-ditch attempt in the Senate by Lindsey Graham, Dean Heller and others today, all indications are that the Party has given up and moved on to tax reform. Last week, Trump tweeted, “Republicans, sorry, but I've been hearing about Repeal & Replace for 7 years, didn't happen!” He added, “Republicans must start the Tax Reform/Tax Cut legislation ASAP. Don't wait until the end of September. Needed now more than ever. Hurry!”

It may seem as if passing tax reform or simply cutting taxes would be the bare minimum that the G.O.P. could accomplish. The Party appears to have everything in its favor. It controls the House and the Senate and the White House. Tax cuts, perhaps more than any other issue, unite Republicans across the Party’s ideological spectrum. The reconciliation process, which prevents a filibuster in the Senate, is available. And several Democratic senators from red states that Trump won in 2016 are up for reëlection next year and could potentially vote in favor of the cuts. If the Republican Party can’t pass tax cuts, it’s fair to ask if there’s anything it can do.

And yet the closer you look at the details of the proposed policy, the parliamentary obstacles in the way, and the ideological cleavages within the G.O.P., tax reform starts to look at least as difficult to achieve as an Obamacare repeal. “It’s not any simpler than health care,” David Burton, a tax expert at the Heritage Foundation who advises the White House, told me recently. “It's just different.” William Gale, a tax expert at Brookings, said, “Republicans seem to think that tax reform is going to be easy because they know taxes, whereas health reform, they figured out, was complicated. But tax reform is not going to be easy.”

America’s modern tax code was devised in 1913, when Congress first created the federal income tax, which at the time affected only the super-rich. In subsequent decades, the code became more complicated and affected more and more Americans, until, in 1954, President Dwight Eisenhower signed legislation streamlining the tax system—and making April 15th the annual tax deadline. After that, gradual changes to the tax code slowly made it more complicated all over again. By 1986, the tax code was again filled with new deductions, loopholes, and special-interest carve-outs, and the time was ripe for another big reform. Ronald Reagan worked with the Democratic Speaker of the House, Tip O’Neill, to simplify the system. As T. R. Reid notes in his new book, “A Fine Mess: A Global Quest for a Simpler, Fairer, and More Efficient Tax System,” each of these last two successful reform efforts came after a thirty-two-year interval. In 2018, it will be thirty-two years since the Reagan-O’Neill reforms.

So it seems like the time has once again come to simplify the code. But nothing has been simple so far for the Republicans and their new President. Nearly everything that Ryan has said about the G.O.P. tax-reform effort this year has been derailed by events. Most obviously, his stated timeline has slipped past the August goal. On Wednesday, Ryan said that the effort would now be completed by the end of the year. Ryan’s original plan also hinged on the successful outcome of the health-care debate, because he was counting on the repeal of the taxes associated with Obamacare, which would make the baseline budget for scoring tax reform more advantageous.

One of the most basic questions about tax reform is whether the legislation will be revenue-neutral. At the beginning of the year, Ryan promised that it would be. But, on Wednesday, when asked by an Associated Press reporter, the Speaker was noncommittal. Republicans want tax rates to be cut. In order to make up the lost revenue, they need offsets elsewhere in the code. Ryan had championed a novel policy known as a border-adjustment tax, which would equalize the tax treatment of domestically produced goods and imported goods and would raise about a trillion dollars over a decade and help offset the deep cuts to both personal and corporate tax rates that Republicans want. But the plan was panned by business interests and never embraced by the White House.

“It’s not going to happen,” a top White House official told me earlier this year, noting that the idea was too radical and needed more time to percolate in conservative media and think tanks. “You’re going to need five years of Heritage conferences, because it’s too complicated for the public. Have you seen it debated on FOX on CNN? It’s complicated for members.” He added, “The tragedy of Ryan’s thing is he’s a wonk who has worked on this for many, many years now. It’s kind of like in health care, not understanding that a big part of this is to get buy-in intellectually from the general populace. I’m not saying guys on the factory floor have to understand all things. But it has to at least make sense so that when politicians and when people on TV talk about it they can understand what this is. We have not done that.”

There have been no serious alternatives to the Ryan plan put forward by other key players in the tax debate that would raise as much revenue as Ryan’s now dormant idea, or that would improve the baseline the way that repealing Obamacare would have. “You’re two trillion in the hole,” Burton said, noting the combined effects of the failure to repeal Obamacare taxes and to embrace Ryan’s revenue-increasing border-adjustment tax.

Because of that gap, the G.O.P. tax plan is now much more unlikely to be revenue-neutral. The reconciliation process would allow a bill to make it through the Senate with a simple majority, but it places some other big boulders in the way. For instance, any bill that adds to the deficit beyond a ten-year window would have to expire after a decade. For months, Ryan insisted that tax reform had to be permanent. George W. Bush’s tax-cut legislation in his first term used the reconciliation process, and, as a consequence, many of the tax cuts expired a decade later, under a deal between Obama and the Republicans. Any G.O.P. plan using reconciliation now seems likely to include a similar sunset.

But even getting to the reconciliation process will be difficult. First, Republicans need to pass a budget, a seemingly simple legislative feat that has proven difficult in recent years. In the House, the Party is torn between its hard-right Freedom Caucus, which wants deep domestic-spending cuts, and defense hawks, who want big increases for the Pentagon, and moderates who want more domestic spending. Kevin Brady, the head of the tax-writing committee in the House, warned his colleagues on Wednesday that they had to overcome their differences. “No budget, no tax reform,” he reportedly said. A senior White House official told me recently, “What can screw up reconciliation is not getting a budget.”

And all this comes before details of the plan have been released. In 1986, when a Republican President joined with a Democratic Congress to pass tax reform, the two sides were able to eliminate popular tax deductions because they shared the political pain of taking on favored industries. If Republicans go after the mortgage-interest deduction, they will be fighting the real-estate industry on their own. If they go after the state-and-local tax deduction, they will be fighting Republican governors and mayors. They won’t get any political cover from Democrats the way Reagan did in 1986.

Despite everything, some kind of tax cut could still be enacted. But it’s much harder than it looks. “From the thirty-thousand-foot perspective, you think, ‘Republicans and tax cuts, that's a slam dunk,’ ” Gale said, “But, when you get close to it, they're really very constrained in what they can do.”

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